Canadian Imperial Bank of Commerce (CM) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC quarterly results conference call. Please be advised that this call is being recorded.

(Operator Instructions)

I would now like to turn the meeting over to Mr. Geoff Weiss, Senior Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us. This morning CIBC's senior executives will review CIBC's Q1 2014 results that were released earlier today.

The documents referenced on this call, including CIBC's Q1 news release, investor presentation, and financial supplement, as well as CIBC's Q1 report to shareholders can all be found on our website at www.CIBC.com. In addition, an archive of this audio webcast will be available on our webcast later today.

This morning's agenda will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer. Kevin Glass, our Chief Financial Officer, will follow with a financial review, and Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with a risk management update.

After the presentations there will be a question-and-answer period that will conclude by 9:00 a.m. Also with us for the question-and-answer period are CIBC's business leaders, including Victor Dodig, Richard Nesbitt, and David Williamson, as well as other senior officers.

Before we begin, let me remind you that any individual speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods to differ materially.

For more information, please refer to the note about forward-looking statements in today's press release. With that, let me now turn the meeting over to Gerry.

Thank you, Geoff, and good morning, everyone. Before I begin let me also remind you that my comments may contain forward-looking statements.

This morning CIBC released record first-quarter results with adjusted net income of CAD951 million, up 8% over the same period in 2013 and up 6% from Q4 2013. Adjusted earnings per share were CAD2.31 compared to CAD2.12 in Q1 2013 and CAD2.19 in the prior quarter. CIBC's adjusted return on equity was 22.1%.

At the end of the quarter, our Basel III common equity ratio was 9.5%. This morning we also announced a CAD0.02 increase to our quarterly common dividend, to CAD0.98. This increase leaves us within our target payout ratio of between 40% to 50%. During the quarter, we purchased and canceled approximately 1.4 million common shares under our previously announced normal course issuer bid.

Our client-focused strategy delivered strong operating performance in each of our business units compared to the same period last year. Retail and business banking recorded adjusted net income of CAD643 million, up 11% from Q1 2013.

In December, we completed the sale of 50% of our Aerogold portfolio consisting primarily of credit card-only clients. When we launched our new Aventura card last year, our goal was to offer our clients leading value and choice in travel redemption. The value proposition of our enhanced Aventura card is resonating well, and CIBC is enrolling new clients at a pace well in excess of our expectations.

Our quarterly travel reward card sales were the highest we've experienced in over a decade. Adding to the strength of our cards portfolio, we recently announced our collaboration with Tim Hortons to launch an innovative co-branded credit card which will offer instant Tim Hortons loyalty rewards to CIBC clients on their everyday spending.

In addition to our cards portfolio, we have begun implementation of our partnership with the Greater Toronto Airport Authority, which was announced in December of 2013. This multi-year partnership established CIBC as the exclusive financial services sponsor at Toronto Pearson Airport. David Williamson is here this morning to answer questions about Retail and Business Banking.

Turning to Wealth Management, Q1 2014 adjusted earnings were a record CAD117 million, up 31% from the same period in 2013. As expected, our acquisition of Atlantic Trust, a US private wealth management firm, closed in Q1. The acquisition has been well received by both the employees and clients, with assets under management growing from CAD20 billion when we first announced our intention to acquire Atlantic Trust in Q2 2013, to CAD24 billion at closing. Victor Dodig is here this morning to answer questions about Wealth Management.

In Wholesale Banking, Q1 2014 adjusted earnings of CAD215 million were comparable with the strong prior quarter. In the Canadian equity new issue market, CIBC led 26 deals and participated in another 56 in the first quarter of 2014. We were a book runner in 3 of the 10 largest deals priced in the quarter and participated in all of them. As a result, we ranked number 2 in deals led in the quarter. Richard Nesbitt is here this morning to answer questions about Wholesale Banking.

In summary, we have had a good start to 2014, with results that outperformed the same period last year. We will continue to execute our client-focused strategy to grow our business and deliver consistent sustainable returns to our shareholders.

With that I would like to turn the meeting over to Kevin Glass. Kevin?

Thanks, Gerry. My presentation will refer to the slides that are posted on our website, starting with slide 5, which is a summary of results for the quarter. So, we are very pleased with our results this quarter and the strong contribution from all of our business units. Adjusted net income for the quarter was CAD951 million, which resulted in adjusted earnings per share of CAD2.31.

Our Retail and Business Banking franchise delivered another strong quarter with continued volume growth in core products and improved credit quality. Wealth Management had a record revenue and net income in this quarter, and in Wholesale Banking, we continued to generate strong earnings.

During the quarter, we had the following items of note. We booked again a CAD0.46 per share in respect of the Aeroplan transaction. As indicated in our webcast last quarter, we recorded a net gain on the sale of an equity investment in our European leveraged finance portfolio of CAD0.14 per share.

We released a portion of the collective allowance recognizing our corporate and other segment of CAD0.05 per share, which included lower estimated credit losses relating to the Alberta floods. We made operational changes to the processing of write-offs in Retail and Business Banking, resulting in a charge of CAD0.05 per share.

And we incurred a loss from the structured-credit run-off business of CAD0.02 per share, and then, as with other quarters, the amortization of intangible assets amounted to CAD0.01 per share. In aggregate, the impact of these items on our earnings netted to a gain of CAD0.57 per share.

The balance of my presentation will be focused on adjusted results, which exclude these items of note. We have included slides with reported results in the appendix to this presentation.

As announced earlier this month in a press release, we made a number of external reporting changes effective this quarter. The only restatement item that had an impact on earnings was the change in pension accounting, which is implemented retrospectively and negatively impacted 2013 earnings by CAD0.13 per share. The other restatements resulted in reallocations between SBUs or line items with no impact on net income.

Moving to the details for each of our strategic business units, I will start with results for Retail and Business Banking on slide 6. Revenue for the quarter was CAD2.1 billion, up CAD57 million, or 3% from the same quarter last year. We had solid gains in our core business lines, partially offset by lower revenue in the other segment due to the impact from the Aeroplan transaction.

Looking at our individual lines of business, revenue in the personal banking segment was CAD1.6 billion, up CAD103 million, or 7%, compared with the same quarter last year. This represented the highest organic growth rate in almost four years. Performance benefited from strong volume growth across CIBC-brand products, which were up 8%, as well as higher fees and wider margins.

We had strong growth in our higher-margin products. CIBC-brand mortgage balances grew 16% year over year and 11% if you exclude the benefit from first-line conversions. Mutual funds were up 18% year over year and deposits were up 8%.

Business banking revenue was CAD380 million, comparable with the same quarter last year. Higher balances and fee income were offset by the impact of lower deposit spreads. Business banking volumes continued to grow, with average funds managed up 5% year over year.

The Other segment had revenue of CAD102 million in the quarter, which was down CAD43 million compared to the same quarter last year, largely due to the impact of the Aeroplan transaction.

The provision for credit losses in the quarter was CAD184 million, down 24% on a year-over-year basis. The decrease was largely due to lower write-offs and bankruptcies in the cards portfolio. Each of our consumer and business lending portfolios in Canada performed extremely well this quarter. Laura Dottori will discuss credit quality in her remarks.

Our non-interest expenses for the quarter were CAD1 billion, up 3% from the prior year, primarily due to our continued investment in the business, including an increase in our front-line stock. As previously disclosed, we have incurred nonrecurring costs in respect to the Aeroplan transaction, as well as the development of our enhanced travel rewards program. We expect to spend approximately CAD40 million in the remainder of FY14, the bulk of which will be in Q2 and Q3.

Net income was CAD643 million, up CAD61 million, or 11%, compared with the prior year. Net income was up 15%, adjusting for the Aeroplan sales.

Net interest margin, or NIM, was 261 basis points for the quarter. This was down 2 basis points from the last quarter, but if you normalize for the Aerogold credit card sale, NIM was actually up 2 basis points sequentially. Looking ahead, the Aerogold sale will reduce NIM by a further 5 to 6 basis points.

Turning now to slide 7, Wealth Management had a very strong quarter with record revenue and net income. Revenue was CAD504 million, up CAD72 million, or 17%, from the same quarter last year, with strong performance from all business lines. Retail brokerage revenue of CAD284 million was up CAD25 million, or 10%, compared to the prior year, due to higher fee-based and commission revenue.

Asset management revenue of CAD174 million was up CAD30 million, or 21%, from the same quarter last year. This was due to higher client assets resulting from market appreciation and net sales of long-term mutual funds and higher contribution from our investment in American Century Investments.

Private wealth management revenue of CAD46 million was up CAD17 million, mainly due to the contribution from our acquisition of Atlantic Trust, which closed on December 31, 2013. Non-interest expenses of CAD349 million were up CAD33 million, or 10%, from the prior year, largely as a result of higher performance-based compensation and the inclusion of Atlantic Trust. Net income in Wealth Management was CAD117 million, up CAD28 million, or 31%, from the same quarter last year.

Slide 8 reflects the results of Wholesale Banking, where we delivered another quarter of strong earnings. Revenue this quarter was CAD594 million, up CAD56 million, or 10%, compared with the prior quarter. Capital markets revenue of CAD330 million was up CAD51 million, or 18%, from the prior quarter, primarily due to higher equity derivatives and foreign exchange trading revenue.

Corporate and investment banking revenue of CAD250 million was up CAD4 million, or 2%, from the fourth quarter, largely due to higher corporate banking revenue, partially offset by lower revenue in our US real estate business. The provision for credit losses was CAD2 million, compared to a recovery of CAD1 million for the prior quarter.

Non-interest expenses of CAD310 million in the quarter, up CAD41 million, or 15%, compared to the prior quarter, primarily due to higher performance-based compensation. Net income for Wholesale Banking was CAD215 million for the quarter, relatively flat to the prior quarter.

CIBC's capital position remains strong with a common equity tier 1 ratio of 9.5%, up from 9.4% in the prior quarter. Risk-weighted assets increased by approximately CAD4 billion this quarter, due to the impact of the weaker Canadian dollar, implementation of the phase-in of the credit valuation capital charge, and also solid business growth, offset somewhat by the Aero sale.

To wrap up, we're very pleased with these results and the continued strength across our businesses. In Retail and Business Banking, good volume growth in core products, higher fee-based revenue, and strong credit performance drove solid results.

Our Wealth Management franchise delivered record results this quarter, plant assets grew 22% from last year, or 9%, excluding the Atlantic Trust acquisition. And in Wholesale Banking, our client-focused strategy delivered another quarter of strong, consistent results.

Finally, we increased our quarterly dividend by CAD0.02, to CAD0.98 per share. So thank you for your attention, and I would now like to turn the meeting over to Laura Dottori.

Thank you, Kevin. Good morning, everyone. So I'll be referring to the risk section, which begins on slide 12. You can see we experienced better-than-expected loan losses this quarter. Loan losses came in at CAD218 million. That's down 20% quarter over quarter.

On an adjusted basis, the decrease was due to three main items: lower losses in First Caribbean; recoveries in commercial banking; and better-than-anticipated bankruptcy performance across our retail portfolios. Combined, these items made for very low loan losses this quarter.

On slide 13, you'll see an uptick in our gross impaired loans for the quarter. This is driven by the Caribbean, the majority of which is FX related. That said, new additions, or formations, were down slightly quarter over quarter.

Turning to slide 14, on an adjusted basis, our net credit losses in cards continued to decrease in the first quarter. This was due to good bankruptcy performance, as I mentioned earlier, as well as the one-month impact of the Aero sale. The calculated delinquency rate was higher in Q1, and that's due to the impact of the Aero sale. Bottom line, our cards portfolio continues to perform well.

Slide 15 shows you our Canadian residential mortgage portfolio by region. Here you can see that 46% of our portfolio is in Ontario, 20% of it is in BC, and 16% in Alberta. The credit quality of this portfolio remains high, with a net credit loss rate of about 1 basis point per annum.

On slide 16, you see our Canadian residential and condo mortgage exposures. The insured portion of our portfolio is 69%, and that includes condos, which account for about 11% of the total. 94% of our portfolio is insured by CMHC -- sorry, the insurance is CMHC, and the weighted average LTV of our uninsured portfolio is 60%. And this is based on December house price estimates.

Slide 17 shows our condo developer exposure. You can see that our authorized loans were CAD2.7 billion; that's down 10% from CAD3 billion last quarter. And our drawn loans were CAD798 million; that's down 13% from last quarter.

And, lastly, on slide 18, you can see the distribution of revenue in our trading portfolios as compared with VaR. So, we had positive results 98% of the time for the first quarter, and that compares with 97% of the time in the fourth quarter of last year. Our average trading VaR was CAD4.4 million, and that compares with CAD4.3 million last quarter.

I'll now turn things back to Geoff.

Thank you. That concludes our prepared remarks this morning. We'll now move to questions. Operator, can we please have the first question on the phone?

(Operator Instructions)

John Aiken, Barclays.

Good morning. Kevin, a point of clarification, in your prepared commentary you talked about additional spend on the development of the card portfolio of about CAD40 million. Was that correct?

Yes, John, that's correct. That's in line with what we'd previously disclosed given what we've spent to date.

Okay. Based on my calculations, you'd already spent the CAD50 million so this to me looks incremental. Is my math incorrect?

No. I think that when we first spoke about the transaction going way back we said that there'd be about CAD50 million odd relating to the launch of the Aventura card and then as a result of the subsequent transaction with TD and Aimia there would be approximately another CAD55 million, CAD60 million. And so given what we've spent so far there's about CAD40 million left to go, which will be spent mostly in the next couple of quarters.

Great, Kevin, and can you let us know what the nature of these expenses are going forward? Are we now evolving into marketing costs?

No. These aren't related to marketing costs. These are primarily related to the development of the Aeroplan product, and making sure that we can transition that effectively and support the new program as it moves forward.

All right. Thanks, Kevin. Just one last one, the step down in the expected margins, I'm assuming that that actually is a step function and not an erosion over time.

That's correct. It's a step function. As I said, there was some portion this quarter and then there will be another five to six basis points in the next quarter.

Great. Thanks for the color, Kevin.

Okay.

Steve Theriault, Bank of America Merrill Lynch.

First, a couple of follow-up questions for Laura if I could. Just trying to understand on the bankruptcy side in terms of sustainability, is there reason to think that the bankruptcy rates are going to be much worse over 2014? Is this, do you view this as a bit of a blip relative to bankruptcy rates or it's just gotten better than maybe you would have modeled for?

And also on the Caribbean, you mentioned improved losses in the Caribbean. Anything unusual going on there or just part of the turn in the Caribbean that's been slow in coming?

Well, Steve, this quarter we had, as I mentioned, really good loan losses. And although the economic outlook remains stable and as you've seen our credit portfolio performance has been really strong. As it relates to the Caribbean, I think that scenario is going to continue to be challenged. There's real weakness in that region. And I think we're going to continue to see real stress on the loan portfolio there.

Our commercial corporate portfolio, you saw this quarter we had a recovery in commercial banking. Last quarter we had a loss of over CAD20 million. So that's a portfolio with event risk with lumpy results.

And for our loan losses in retail, we have seen really good bankruptcy numbers. It feels good.

That said, we go back and look at our historical loan losses in this space. They haven't been this good since the first quarter of 2007. And so I guess where I'm sitting at when I look to the future, I do think that higher loan losses really can't be discounted as a possibility.

Okay. That's helpful. For David, if I could, Gerry mentioned the success you've been having on the premium card offering. Hoping to get a little bit more detail if you could talk about the immediate level of success you're having both with the revamped Aventura card and the revamped Aerogold card, especially with the Aerogold card I'm interested in the growth in cards given the marketing restrictions you have with -- admittedly limited track record, but I'd be interested in your immediate reaction, Dave.

Certainly, Steve. So the sales first what we're -- I'll step back and say what our objective here is to offer choice. So it makes sense that I speak to both the cards.

So Aventura, for those that like optionality as to how they travel, sales have been great. Percy the Penguin has certainly been a hit, caught the imaginations of our clients and consumers generally. So the Aventura sales have been well beyond what we had planned and hoped for. So that's been strong right out of the gate.

In the Aeroplan space, that started out slow. So through the end of the calendar year last year, sales weren't what we were looking for. And I think deals were being announced and there was some noise in the marketplace. But more recently, that's greatly improved and we're now tracking on Aeroplan sales above the levels we'd planned for.

So in aggregate, it's worked, it's working. And that's, as Gerry pointed out, our travel card sales this quarter, it's the best quarter we've had in over a decade, and it's about, as you put it, Steve, both cards, putting forward both the Aeroplan card and the Aventura.

So there's still lots of pull demand on the Aerogold card even though it's not being as actively marketed?

Yes. There's pull demand, but also push in the sense that when someone comes into any one of our touch points, telephone, or branch, or through any of the customer touch points, the process we're undertaking isn't -- have an Aventura, it's what as a client are you looking for? Travel card or cash back travel? Do you like to fly Air Canada, do you like to have optionality? And therefore it's not just pull. We're trying to put forward the product that would best meet the client needs.

Okay. Thanks, Dave.

Thanks, Steve.

Jason Bilodeau, Macquarie Capital Markets.

Just a question for David. Just wanted to get your take on the temperature of the mortgage market in Canada and the pace of growth. Obviously you guys are doing something strategic to move to your in-branch and getting great growth there, but how do you feel about the broader market in terms of the pace of the growth? And specifically do you think that it's wise that anybody needs to take a look at any other additional policy changes to try and curb the pace of mortgage expansion here in Canada?

Certainly, Jason I'll have a crack at that. I think at this point, we're seeing the right moves in the market. There's been quite a few policy changes. Interest rates remain low but there has been that countervailing move and policy change over an extended period at this point in time, so for my own -- and I admit it's a personal perspective,-- I don't think there's additional moves necessary.

From our own bank, 16% growth is -- that could cause you to think maybe policy changes are required, -- But if you de-comp that, there's parts that are coming in from the FirstLine conversion which takes us to 11. Still really robust growth. But that's really not an industry things so much as us taking steps to accelerate our ability to sell.

So we're increasing our mobile advisors. We call them mobile advisors now because they now are enabled to sell more than just mortgages. We've got the technology with them rolling out so that they can offer additional products.

But that was a channel that we were not up to industry standards as far as the size. And we're moving that forward. That's giving us a wind assist. So I think there's CIBC-centric reasons where why we're seeing this kind of level of growth in mortgages.

The overall industry looks like it's moving in the right kind of way, not a short sharp kind of adjustment. More of the soft landing that people are speaking of. So I'd say at this point, we're okay and that additional policy changes can be held as we just watch how things play out.

And sorry, your view in terms of the market slowing appropriately, volume growth somewhere in the mid to low single digits for the year for the industry? Is that the type of pace you think is reasonable?

Right now, we've been all collectively calling for that slowing for an extended period of time. It feels like it could be that or even a bit beyond that. But again the interest rate declines that started a while ago have kind of petered out. So I think it might be stronger than that, but if we look for more of a mid-length of a cycle, it seems like it's heading the right way.

Okay. Sorry, one small follow-up question, and I apologize if I missed this before, but in terms of the payments between TD and CIBC or vice versa, if there's some migration of clients, have you talked to us about when that gets measured and when those payments are determined?

I don't think we have talked about that, but I'd be happy to do so now. We're only one month in. And then there's a period of time to evaluate the nature of payments, so even next quarter will probably be too early to get a sense of what the payments might be.

This would be a longer track record. So it might actually be two quarters out where we could say with any degree of certainty, here's how this looks like it's playing out.

Okay. That's it for me. Thanks, guys.

Thanks.

Michael Goldberg, Desjardins Securities.

When Royal Bank announced the sale of its Jamaican business, it came to my attention looking at other Jamaican banks, that CIBC's Jamaican bank is similarly marginal in that market. Did you negotiate also with the buyer of Royal's business and are you considering the sale of your Jamaican business as well?

And following along the same line, what shows up as other country net impaired loans, I presume that given your disclosure here, looks like about 60% of that is other country. What other restructuring should we expect in the Caribbean? Is there any goodwill or other potential write-offs -- write-downs?

Michael, it's Richard. I'll start on the strategic side and then Kevin will talk about the goodwill and other matters.

We did look at the, not intimately, but we did look at it from a distance, the Jamaican operation of RBC. And decided it didn't fit -- it didn't add anything to what we have in Jamaica.

Jamaica is a large -- a relatively large island with a large population. And in the future it will become our main operating center. So Jamaica is an important part of our potential future growth along with a couple of other islands in the Caribbean.

I'll let Kevin talk about -- could I just mention the restructuring we're doing? As we talked about a couple of quarters ago, we've undertaken a downsizing of our staff and a number of other cost reduction issues. That's well underway. We're well through that process right now.

There's a third stage that's currently being worked on and it's going very well. It's helping getting our costs down in the region. Kevin, over to you.

Thanks, Richard. Michael, with respect to goodwill, we performed our last impairment test in Q4, 2013. And at that point we determined that the carrying value of our goodwill was adequately supported and we've disclosed in a lot of detail our tests.

But what I'd say is those tests were based on forecasts reflecting both the currently challenged economic conditions, but also an expected recovery in those conditions over the forecast period. And I think it's fair to say that the region certainly continues to be very challenged and we continue to monitor that situation very closely.

So while FCIB, our Caribbean operation, performed reasonably well in the quarter, given the current economic conditions, an impairment to goodwill could occur if we change our expectations with respect to the timing and extent of the recovery. Were that to worsen, we would certainly look at goodwill. But then obviously important to note that if there's a goodwill impairment, there's no impact on our rate capital because goodwill is currently deducted.

And if I could just weigh in, it's Laura, for the wet blanket risk view, as I mentioned earlier, we do expect to continue to see stress in that loan portfolio in the Caribbean. So I do think we'll continue to see economic weakness there as well. So we should just keep that in mind.

And can I just clarify what my remarks were? So when I said, we're fundamentally, our largest base is in Barbados, Bahamas and Cayman. What I said was Jamaica will become our operations center not our main center of operations, so I just want to make sure that's clear. We'll be processing in the future more in Jamaica than we do today.

Okay. Just maybe a couple of follow-ups. In looking at market share of Jamaican banks, it looks like Royal made the decision to exit because they were marginal relative to other banks.

As I said, though, First Caribbean, looks equally marginal in that market against other Jamaican banks. So why would you continue to stay? And secondly, how much goodwill do you still have on First Caribbean?

So Michael, your analysis of our size relative to RBC is correct. But that doesn't lead us to make necessarily the same conclusion as RBC. Our relative size is about the same.

Michael, with respect to goodwill, I think we had just over $700 million.

Thank you.

Meny Grauman, Cormark Securities.

My question is about deal outlook. A large competitor yesterday talked about how they're looking at a lot of deals but pricing's not right and it's very challenging to make the math work. I'm wondering as you look in the US for further wealth management deals, what type of environment are you encountering?

Hi, Meny, it's Victor Dodig here. Just from the outset, our strategy in wealth management is to grow our earnings to 15% or more of CIBC's earnings. And we're very much making progress along those lines. In 2012 we're at 9%. In 2013 we're 11%. And this quarter we're at 12%.

As we grow from the 12% to the 15% we see growth coming in our home market accounting for about a third of that growth. We've got scale in Canada and we can continue to grow that partnering with our retail bank to bring our clients the right level of investments, the right investment expertise to grow wealth management.

As we look at the rest of the growth we are focused particularly on the US market. We've exhibited financial discipline and strategic discipline as we've made our investments in American Century and Atlantic Trust. They've both been performing well and as we look at further growth initiatives, we would look in those areas of asset management and private wealth management. Prices have gone up but one thing we will always focus on is strategic fit and financial discipline over the medium-term.

Thank you.

Sumit Malhotra, Scotiabank.

Good morning. First question is for David Williamson, please. I want to go back to the outlook for net interest margin. So David, if we take the comments earlier on the credit card impact going forward being an additional five or six basis points, I was hoping you could walk me through the so-called normal course trend that you see for NIM. It seems to have been a reasonable quarter for margins though we've obviously seen interest rates move lower in the last couple of months.

And I also wanted to tag in the fact that you've had the benefit from the mortgage repositioning. So a few moving parts. Just wanted to get your take on maybe how much benefit is left from the mortgage repositioning, how long it takes from some of your own credit card efforts to come on board and what's happening in the market as a whole? Kind of a full question there, but an important line I was hoping you could help with.

Certainly, Sumit. I'll jump in on that. So let's go back to last quarter's conference call. That point in time. And it came up in an earlier question too, a step change in net interest margins of about 10 basis points, as a result of the change in the Aeroplan portfolio.

So this quarter was a part quarter. Five-ish weeks after a transfer of value. So that's four basis points this quarter. So our underlying operations are up two basis points on a quarter-over-quarter basis. The continuing operations if you will.

And then next quarter will be a full quarter, post transaction. And that will drop through another, as Kevin said, five to six basis points. Again a step change in NIM's.

So to your question, Sumit, which is what's the underlying direction here? We've been guiding to stable net interest margins and I'd continue to guide us to that outlook.

A couple of factors though that obviously are in play. One is the first line mortgages -- so that does help. And our retention levels are continuing around 50%.

And the margins are about double what we were getting in the broker channel, which as just a side comment, looks like what we'll do is take that CAD48 billion in balances, keep half of it, but end up with more net earnings once that process is over. But nonetheless as far as coming back to the question itself, the net interest margins, that lifts it.

Offsetting that industry factor is interest rates, as you pointed out, haven't been coming out, so that's still on a year-over-year basis is a grind. Less than what it's been in the past, but still, so hence that's why we guide to neutral. Interest rate decline is still a factor, offset by the advantage we have in FirstLine.

Other factors are, we are competing in a way to be sensible on pricing. Both in mortgages -- we're not certainly not the first to move on price decreases, but we try to be sensible in our pricing on that front. And on credit cards we are looking to grow. We talked about Aventura and Aeroplan, Gerry mentioned the Tim Hortons card. Which shows all the signs of being a very powerful and good card. And we've got another one in the pipeline that we're working on. So as that builds, our credit card business from this base, as it builds that, as you point out, Sumit, will also help margins going forward.

Okay. So if I put that all together, I think the summary would be: you'll have the reduction next quarter from the full quarter impact of the sale and holding at that level in taking into account your benefit from the runoff versus the environment as a whole would be a reasonable expectation?

Exactly right.

Okay. Very quickly a somewhat similar question for Richard Nesbitt. You continued to post very strong growth in the corporate loan portfolio. I know that was a strategy you had espoused a few years ago and it seems to have gone very well. Just wanted to get a little bit of information from you.

It's probably something we can dig up from the sub pack, but how much of this corporate loan growth for the bank is taking place outside of Canada? If you had to put round numbers percentage-wise on it? And do you feel it's translated into additional investment banking or aggregate capital markets activity as well?

Okay. So you're right. We did talk about this going back three years ago now, that we were intending to grow our corporate bank. And that goes back of course to the decision we made back in 2009 where we were going to have a separate corporate bank separate from our investment banking, and that's -- you're right, that's worked out extremely well.

We are -- we do -- we have wanted to grow in Canada and we have grown in Canada, but we're still only number 4 in Canada. So that would indicate to me that there's still some room to grow in Canada. About half of the growth you've seen has been outside of Canada.

So that would be United States, which would be a combination of energy and mining and infrastructure loans and real estate, commercial real estate finance loans, which we do, those are our main activities in the United States. And we really do try to stick to those activities.

We've done some growth over in the UK, primarily in infrastructure and energy. And some growth in Asia, primarily in infrastructure down in Australia.

So we're going to continue on with that plan. It's worked very well. The core of the plan, though, is to sell additional products to the same clients we're selling -- we are providing credit to. And we're becoming very successful in the ability to cross-sell. So that is a key part of this whole strategy.

I would say though, that the pace of growth will slow over the next few years. But we'll still continue to grow.

Thanks for your time.

Mario Mendonca, TD Securities.

Good morning. A question on interchange. There have been some developments there in the budget. Is there anything you can offer on what your outlook is for how things could change? And, or to the extent that you can offer any -- if you can size the revenue and the -- essentially what's that risk here if interchange fees change?

Hi, Mario, it's David. There's been discussion but there's no confirmation of any change in the area. I think it would be pretty speculative for me to comment on it. Obviously, if there was any changes in the future, they'd be industry wide. But at this point, it's pretty, it'd be totally speculative.

And are you open to sizing it? How important interchange really is to the bank?

It's important to this bank and all the banks. Why it's speculative is you've got all the banks that are players in credit cards, to different degrees. But if there was any changes in this space, there is complexities to it. The interchange for MasterCard is different than what it is for Visa. It's different for big players in classics than what is for premium.

So that's why it would really be probably not a good idea to focus too much at this point because you've got, would there be a change? And if there is, then you'd need to evaluate the different banks as to whether they are MasterCard players or Visa players, classic or premium. Because it would impact the relative impact between the banks.

Okay. One other thing, then, also on the budget. The captive reinsurance is now coming up, and I appreciate this is, I've learned that this is a touchy issue with everyone but I want to make sure I understand what's at stake here. I understand that the banks for the most part are re-ensuring their creditor business.

What would be helpful to understand is if CIBC reinsures or swaps out -- reinsures anything more than the creditor business, or is there credit cards that are insured and swapped out? What else is done besides mortgages?

It's Kevin. I think that that level of disclosure is probably inappropriate. I think it's a pretty fresh announcement, so we're still evaluating it. And we're still deciding -- trying to evaluate exactly what the impact is.

Okay. Then I'll ask a different type of question for Laura. On PCL's, there are two dynamics that are playing out next quarter, it would seem. One is it can't be as good as it was this quarter and I think you made that point.

And the second is that more of the cards are gone for the full quarter. When you put those two together, does Q2 feel like, from PCL's perspective, more like Q4, 2013? Maybe just some guidance on how those two dynamics play out together?

As you know, we don't give forward-looking guidance. What I can say is this quarter feels very good and perhaps I've been in risk too long, but it feels too good. I continue to be concerned with the outlook for our Caribbean loan portfolio.

As I said, commercial, corporate, a lot of event risk there. Very lumpy portfolio. Not often we get recoveries in a quarter like we had this quarter.

And as it relates to retail, we had surprisingly low losses there. So I guess, I said it earlier, but I wouldn't discount higher loan losses as a possibility. Going forward.

Taking into account the sale of the cards as well?

Yes. Taking that into account as well.

Thanks.

Peter Routledge, National Bank Financial.

Thanks. Just a follow-up, David to the comment you made earlier which is, you mentioned again you had about 50% conversion of FirstLine and then double the margins. And that's quite a positive result as you pointed out. How are you achieving that? Is that demand driven; i.e., are the first line clients that you're converting, are they just much less price-sensitive than you thought? Or are you doing something with the offer that's just compelling or bringing more people in?

Hi, Peter. No, the big delta there is just that channel is really expensive. It's good for getting volume.

Yes.

It's never been very good for margins. And there might have been better days at some point in the past, but it's just a thin margin channel. So by taking people into the full branded channel, it's not so much a different price point for the client so much as it is just an avoidance of some of the friction costs through the other channel.

As far as how we're getting level of conversions we're getting, a dedicated team that's there to reach out to clients when we think they're at a point where they'll be evaluating their mortgage. We're using some analytics to try to figure out if they are price-sensitive. And if they are, we're calling earlier because we'll be thinking about it. If we think they're not, then we're calling later, so we're trying to be thoughtful in how we approach. And then we are getting continually better at welcoming those clients into CIBC.

So an outreach from a local branch and an attempt to broaden the relationship. And that's gotten better over time as this process has rolled out.

So I think we're now, with all things being equal, pretty confident we should be able to run at a 50% retention level which is better than what we had thought would be possible. The margin should keep at double because it's not a market focused thing so much as a friction avoidance thing. And expenses are down a tinge too. So net-net we should be able to go from CAD48 billion to CAD24 billion and have a better bottom line.

Yes. Just turning over on the business lending side. It's been growth in -- your business lending portfolio has been a little light the last couple quarters. Is that demand driven or are you just pulling back a bit from the market?

Two factors. One, we are pulling back. Lending growth has been reduced as a result of our decision to pull back in a specific area and that's commercial mortgage growth. So we're holding that book flat.

It's not -- if there's a relationship there, we'll be there in that book. If it's more commodity, we're not there, because it's thinner margins. And that's definitely affected our growth.

In addition, we transferred some clients and business units over to wholesale bank just because they're better to be in that book as things evolve and as clients evolve. If you adjust for those two impacts, our year-over-year growth rate is closer to peers'. It's over 7% volume growth year-over-year if you adjust for those two factors.

All right. That's helpful. Thanks very much.

Thanks, Peter.

Darko Mihelic, RBC Capital Markets.

Hi. Thank you. Good morning. First, just a clarification question. On page 20 of your supplemental, I just wanted to clarify the movement in the gross impaired loans in residential mortgages by 10% quarter-over-quarter. Is that relating to the currency issue that you spoke about, Laura, or is that something else?

Yes, so there's some currency in there. And that's largely FCIB, largely in the Bahamas.

And that would explain most of that change? Would that be the correct way to think of that?

Yes. That's right.

Okay, and then my second question, which is far more strategic, is a question with respect to the 50% retention of mortgages from the FirstLine channel. It's hard to believe that those are all CIBC clients in the full utmost way. Most of these would've come from the broker channel. Think about your natural share. So the question is, why keep them?

And if it's just pure margin, and on its own, it's a profitable product, that's great. But if it's not, the question is, can you actually convert these people to, or deepen the relationship as you so say it? What would the potential success be of that? And what's the upside to CIBC of converting them to, making them full-on CIBC kind of clients? Thanks.

Thanks, Darko. That's a fair question. The way we're looking at it is it's a great source of new clients to the bank because these clients pretty much solely had a mortgage. We tried in early days to see if we could, under the FirstLine banner, build deeper relationships with them. But we weren't even selling a CIBC product.

They had a mortgage that said FirstLine on the top. So they really didn't see themselves associated with CIBC in any way -- unless they read the fine print and it said this mortgage is administered by CIBC. So this is really an opportunity to do exactly what you're talking about.

Strategically, it's a source of of a lot of clients that we'll introduce into the CIBC brand and there's an opportunity, but not a certainty, that we'll get deeper relationships with them. And in the early days, it was tough because the notice to the branch that someone's coming into CIBC to take the mortgage was slow, so we reached out too slowly to the client. So we've tightened that up.

We've introduced bundles for those clients coming in. You now have a CIBC mortgage, if you have these other products, it's cheaper. And we've also as part of that offered, as part of that bundle, lowered costs, right. So, trying to entice that deeper relationship.

You're absolutely right, we're not getting 100% by any stretch, of those coming in. But they now have a CIBC mortgage, they're now part of the family, and we've got a solid shot of getting a deeper relationship.

But I guess what I'm asking is, what is the early success rate of getting another product into the hands of these people that you're bringing over that are not, quote-unquote, or were not previously core CIBC customers?

Right. So we haven't -- I hesitate to, because I'm not sure what the other banks' level of cross sells are, so I hesitate to put out the achievement we're getting. All I can say is it started out slow and it's improving as we move forward in getting those deeper relationships.

We're actually learning in that space as to how to do it, bundles, outreach programs, and frankly, that's informing some of the stuff we're doing in credit cards, where we have direct-sales and we know historically a lot of single product clients. So now as we look at Tim Horton's and other kind of activities, where we have new clients coming in, they could be single product unless we take action. We're trying to apply those skills -- outreach calls, frequent interactions, bundles, offers -- to try to build that deeper relationship.

Okay. So I guess the last part of my question there was, if you don't get upsell, if you don't get cross-sell, is the relationship profitable enough on its own to warrant keeping it?

Yes. It clearly is.

Okay. Great. That's all. Thank you.

Thanks, Darko.

Robert Sedran, CIBC.

Hi. Good morning. David, you mentioned you're happy with the Penguin, but all the banks have really been increasing their marketing spend and attempting to get some of this credit card business that seems to be in transit. I'm wondering if you can talk a little bit about the competitive environment, both from the perspective of what you're seeing on credit standards -- Are people loosening credit to attract business? And also on the fee side -- How much fee waiving is going on and discounting of fees in order to attract customers?

And then maybe talk about how CIBC is reacting on both of those things. I'm curious with a lower credit card balance are you more willing to take credit card risk to help grow that book?

Certainly, Rob. So you're right, it's a competitive environment for sure. So we're actually within that environment, we're putting out a competitive offer as far as welcome points and fees. So we're staying competitive.

The fact that inside that environment we've had the best sales quarter in a long time, is causing us to feel good. It's causing us to feel that this choice offer is a good one. We started out, as I mentioned before, not where we wanted to be on Aeroplan sales, but that's now reversed and that's coming on too. So we've got strong Aventura, strong Aeroplan, within the context of this competitive environment.

What we need to track is how those new card relationships develop. Because with the fee waivers and so forth you could end up with empty cards. So what we've tracked so far is the cards we've been selling have been developing per historic standards. So that's good, and we'll need to continue to monitor that that's the case.

As far as credit risk, we have not adjusted our policies to lower the standards to which we operate. I'd be happy to allow Laura to jump in and confirm that, but that's not the basis upon which we're competing.

You don't get the sense that is happening at all in the marketplace either? It seems to be more on points and features -- and fees, sorry?

For sure, from my perspective it's features. It's advertising. It's welcome points. And fees is the basis upon which people are competing.

Okay. Thank you.

Thank you.

That is all the time we have for questions today. I would like to return the meeting to Mr. Weiss.

Thank you, operator. That concludes our call. If there are any follow-up questions please don't hesitate to call Investor Relations. Have a good day.

Thank you. That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.